Cointegration and Price Discovery Mechanism of Major Spices in India

P. K. Sahu^1, , Soumik Dey¹, Kanchan Sinha¹, Herojit Singh¹ and L. Narsimaiaha¹

¹Department of Agricultural Statistics, Bidhan Chandra Krishi Viswavidyalaya, Mohanpur, Nadia-741252, West Bengal, India

Cite this paper:
P. K. Sahu, Soumik Dey, Kanchan Sinha, Herojit Singh and L. Narsimaiaha. Cointegration and Price Discovery Mechanism of Major Spices in India. American Journal of Applied Mathematics and Statistics. 2019; 7(1):18-24. doi: 10.12691/ajams-7-1-3

Abstract

Price discovery is one of the major functions of the commodity market to hedge sharp price fluctuations, protecting the interests of both farmers and consumers. Production and export of major spices from India is gradually gaining importance in foreign market and also on Indian economy in terms of foreign currency reserve. This study makes an effort to understand the price discovery mechanism by identifying the transmission of price signals between spot and futures market of four major spices (chilli, turmeric, cumin and coriander) that are traded in National Commodity and Derivative Exchange (NCDEX), India using daily price data from October 2015 to April 2017. Among other statistical tools, econometric methods viz., Cointegration test, Granger Causality test, Vector Error Correction Model (VECM) are used in assessing the price behavioural pattern between spot and futures market. Cointegration analysis reveals long run associationship between spot and futures prices in chilli,turmeric, cumin. The study also reveals that both spot and futures market play leading role in the price discovery process and are informationally efficient in reacting to each other. On the other hand uni-directional causality is evident from futures to spot price in case of coriander. It is expected that both the producers and the users of these important spices will be benfitted from such findings and will help them in harvesting better profit by hedging out the uncertainity in the spice market.

Keywords:
agriculture commodity market cointegration econometrics price discovery VECM

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